Why fintechs should be held to CRA standards

A recently released Treasury report advocated an industry-friendly approach to fintech regulation. It was immediately followed by the Office of the Comptroller of the Currency’s announcement that it will begin accepting fintech bank charter applications with a much relaxed “financial inclusion” standard instead of conventional Community Reinvestment Act requirements.

But the problem with this approach to fintech regulation is that a financial inclusion “commitment,” however ultimately defined by them, is at best “CRA-lite” and at worst an outright CRA exemption. In other words, financial inclusion suggests CRA exclusion.

Financial inclusion is already evaluated for banks, not only in their fair-lending reviews but also in CRA exams. Basic banking accounts and other community development activities designed to make financial services broadly accessible are considered in the community development portion of CRA’s service test.

Andrew Harrer/Bloomberg

Financial inclusion is therefore just one subset of CRA’s broader menu of lending, investment and service activities. CRA requires regular exams and public evaluations and ratings, with considerable community input, which is considerably different from a fintech making a financial inclusion commitment.

Consequently, the use of a financial inclusion standard for fintech charters would place traditional banks at a disadvantage. Fintechs want a bank charter but not the expenses or community obligations that go with it. They already have a major overhead advantage with their branchless delivery system, and now they want an additional regulatory advantage with a CRA exemption.

My recommended solution is to require CRA for fintechs — or any other firm desirous of a banking charter. CRA has been around for over 40 years, and most bankers have learned to live with it. CRA needs some reform (for example, it’s worth noting that 98% of banks get passing CRA ratings), but that’s no reason to exclude fintech firms from the law’s requirements.

Fintechs sometimes argue that their models, which generally offer branchless financial services, render the “local assessment area” concept within CRA irrelevant. But, as I’ve argued before, the existing CRA structure can work for fintechs of all kinds with some basic reforms.

For example, all fintechs should have a primary national assessment area where they could meet their CRA obligations anywhere in the country. But, there would be a secondary assessment area defined as any Metropolitan Statistical Area generating 5% or more of a fintech’s business; a proportional amount of its CRA obligations would be “reinvested” back into that community. So the reinvestment criterion of CRA for a fintech would not be based on a branch footprint but rather a digital footprint defined as the location of the households or businesses they deal with via the internet.

Arguments against extending CRA requirements to fintechs not only ignore how CRA can be tailored to them but also question the importance of CRA. For example, one recent article selectively cites a 2015 Congressional Research Service literature review on CRA’s effectiveness, which is quite different from an academic study, to somehow conclude that it found that CRA “dampened bank lending” in low- and moderate-income, or LMI, areas.

This is contrary to that review’s finding that CRA’s incentivizing of LMI credit availability is “not straightforward.” Concluding that CRA dampens bank lending in these areas is not dissimilar to the urban legend that CRA caused the recent financial crisis.

The claim that CRA has dampened LMI lending is contrary to the documented results and purpose of CRA, which is to increase, not decrease, bank lending in such areas. A 2017 literature review published by the Federal Reserve Bank of Philadelphia found that CRA has a “positive impact” on credit and is an “important incentive to promoting economic growth through sustainable rental and homeownership opportunities in LMI communities.”

While the fintech industry and its lobbyists may have found sympathetic ears at the Treasury and OCC, theFederal Deposit Insurance Corp. and the Fed need to flex their regulatory muscles by proposing their own fintech bank charter standards with CRA requirements. Otherwise, Congress should step in and do the job for them. In fact, one member of Congress has already investigated fintech lenders and found that “fintech loans are more likely to be used by minority owned companies” and that “more action is needed in order to limit unfair business practices.”

The financial industry already has one major category of federally insured financial institutions — credit unions — that are exempt from CRA. It does not need another.

It’s crucial that banking regulators get their act together and not provide fintechs an exclusive express lane through the bank charter tollbooth.